Avoid using the plan to pay off debt; instead roll the proceeds into an IRA

NEW YORK (CNNfn) - If you get part of your spouse's 401(k) in a divorce settlement, you might think of it as a great source of cash. But there are some potential roadblocks.

In response to a reader's question, Mark Groesbeck, a certified financial planner from Houston, and a member of the Financial Planning Association, suggested rolling the money into an IRA in the name of the divorcee to avoid current taxes.

Due to divorce I am getting half of my ex's 401(k). I want to use some of the money to pay my student loan and put the rest into savings. What is the best way to do this with the least penalty or tax bite?

When you receive part of a 401(k) as part of a divorce settlement, there is a way to roll the proceeds into an IRA. When a person who gets divorced has a settlement and something called a QDRO (Qualified Domestic Relations Order), the proceeds of the 401(k) can be rolled into an IRA in his or her name.

Thus the assets will continue to be tax-deferred and not currently taxable. If at all possible I would suggest that this be done.

If you need to use some of the assets coming from divorce to pay off debt then I would try to use non-401(k) assets to do this first.